INFY: Positives Headed into Calendar 2011: Janney

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Notes from Analyst Day
Positives Headed into Calendar 2011

INVESTMENT CONCLUSION:
We attended Infosys analyst day held in New York City. The chief concern on
investors minds is what does the demand environment looks like for calendar 2011.
Although it is too early to tell, there are some early positive data points: the demand
environment is improving, slightly larger deal sizes are coming back, 2011 IT budgets
are expected to increase annually, budgets are expected to be set according to the
normal calendar patterns, Infosys is comfortable hiring ahead of demand (increased
confidence), and there is the potential for price increases. Investor's will get a better
idea of future growth potential expectations in the up coming months, but these signs
are encouraging. We maintain our BUY rating.



KEY POINTS:
• Initial prospects for the demand environment in calendar 2011 appear
positive. Infosys reported strong, broad based, volume driven 10% sequential
growth in the September quarter. The sequential growth rate was the strongest
since fiscal 2008. Management reported that the business environment continues to
improve as customers are beginning to think about growth again.

• Infosys is focused on expanding its addressable markets. Geographically,
continental Europe is a focus (21.8% of revenue) particularly France and Germany.
From a delivery perspective, Infosys is using new geographic locations such as
Mexico, Brazil, and China. Across the verticals, management is looking to further
penetrate manufacturing and retail and newer offerings such as public services, life
sciences, and energy (Smart grid). On the services side, smaller offering such as
BPO continues to gain traction. Infosys is working toward increasing the amount of
outcome based pricing (10% of revenue).

• Infosys goal continues to be high quality growth. Management will not trade
profitability for revenue growth. Current challenges are economic uncertainty,
currency volatility, and regulatory changes. Currency could emerge as the biggest
challenge as the rupee has appreciated 4% toward the end of the September
quarter. Management has effectively used margin levers to maintain operating
margins in the 29% to 30% range which is expected to continue. The tax rate is
expected to remain in the 26% to 27% range.

• Banking and Capital Market’s revenue growth is being driven by
non-discretionary work. Infosys remains cautious about the prospects for
discretionary spending in the banking vertical. The majority of spending is
currently being driven by non discretionary work coming from M&A, regulatory,
and rationalization activity. The prospect for increasing discretionary spending
improves along with the economy. The banking vertical is focused on growth areas
such as mobility, social commerce, risk management, and operational efficiency.
The M&A work being done in the vertical is considered to be more “block &
tackle” work and should take a while to completely tapper off which is a
positive read across for Cognizant, who has reported seeing an increase in
revenues in BFIS from M&A related work in 2010.